Isle of Man approves law to avoid EU blacklist

The Isle of Man’s parliament has approved tax legislation that will allow the jurisdiction to avoid being put on the European Union’s blacklist.

Tynwald gave the green light this week to the Income Tax (Substance Requirements) Order 2018. This means that from January 2019, companies engaging in “relevant activities” will have to demonstrate that they meet specific substance requirements, to avoid sanctions.

Its focus will be on business sectors identified by the EU including banking, insurance, shipping, fund management, finance and leasing, headquartering, holding companies, distribution and service centres and intangible property.

This Order follows a comprehensive review that was carried out by the EU Code of Conduct Group on Business Taxation (COCG) in order to assess over 90 jurisdictions, including the Isle of Man (IOM) against standards of tax transparency, fair taxation and compliance with anti-BEPS (base-erosion profit shifting).

The review process took place in 2017 and although the COCG were satisfied that the IOM met the standards for tax transparency and compliance with anti-BEPS measures, the COGC raised concerns that the IOM, and other Crown Dependencies did not have “a legal substance requirement for entities doing business in or through the jurisdiction.”

The Isle of Man is currently on the EU’s greylist of jurisdictions that have committed to undertake specific reforms to their tax practices before the end of the year. Without this Order it would have been placed on a blacklist and faced sanctions as well as reputational damage.

The legislation will require companies that are tax resident in the Isle of Man and which operate in these business sectors to demonstrate a minimum level of substance here.

Substance requirements are set out in the legislation and some of the requirements vary according to the business sector.

The EU list, first published in December 2017, was divided into three sections: cooperative jurisdictions, non-cooperative jurisdictions and jurisdictions that had undertaken to modify their tax regimes to comply with the rules set by the Code of Conduct Group (CCG).

Many of these greylisted jurisdictions operate tax transparency regimes that are at least as good as the white-listed ‘cooperative’ jurisdictions, but fell foul of the CCG’s additional criterion that businesses should only be granted tax residence in a jurisdiction once they demonstrate they have adequate economic substance there.